Passive income seekers are spoilt for choice in today’s FTSE 250, but few yields look as eye-catching as Ithaca Energy’s (LSE: ITH). This income is money earned with little effort, of course.
With a current 16% dividend yield, the North Sea energy operator looks like a veritable cash‑flow machine to me.
Recent acquisitions and a robust hedging programme appear supportive of its income. But strong tax headwinds remain.
So, how sustainable is Ithaca’s dividend engine, and how much passive income could it generate?
Dividend sustainability
In 2024, Ithaca paid a total dividend of 34 cents (25p), equating to a current yield of around 16%. Of course, dividend yields move inversely to share prices, so the payout can rise, fall, or hold steady.
An added complication is currency, as the exchange rate between the US dollar and sterling shifts constantly. While some firms — such as BP — fix a permanent sterling equivalent for each dividend, many others, including Ithaca, do not.
However, taking both share price and FX into account, analysts currently forecast Ithaca’s dividend yield at 12.3% in 2026 and 11.3% in 2027.
By comparison, the present FTSE 250 average is 3.5% and the FTSE 100’s 3.1%.
How does the core business look?
The powerhouse behind any firm’s dividends is earnings growth.
A key risk for Ithaca is the UK’s ‘Energy Profits Levy’ (EPL) — the ‘windfall tax’. Extended until 2030, it has lifted the effective tax rate on North Sea producers to around 78%.
Indeed, Ithaca’s 2024 results saw earnings before interest, taxes, depreciation, amortisation and exploration expenses falling 18.4% year on year to $1.405bn (£1.06bn). This was driven by lower oil and gas prices and reduced production.
But its net profit dropped 29% (to $153.2m), after a $351m tax payment, most of which was the EPL.
That said, Ithaca expects 2025 operating costs to remain in the low $20 per barrel of oil equivalent (boe) range. And it forecasts its oil and gas production will rise to a maximum 115,000 boe per day (kboe/d) from 105.5 kboe/d. This follows its $975.8m October acquisition of Italian oil and gas giant Eni’s UK assets.
Analysts forecast the firm’s earnings will grow by a standout 18.4% a year to end-2027. This should underpin ongoing high dividend yields.
High passive income generator
Investors considering a £20,000 stake in Ithaca would make £41,586 in dividends after 10 years. This is given the aforementioned caveats and using the most conservative forecast over the next three years.
This is based on the dividends being reinvested in the stock (‘dividend compounding’) and the 11.3% yield.
After 30 years on these twin bases, the dividends would rise to £563,982.
Including the £20,000 initial investment, the holding would be worth £583,982.
And this would pay an annual passive income of £65,990 at that point.
My investment view
The sheer effort of not buying this stock is giving me a pain behind the left eye. I have no idea what that means, but it cannot be good.
In any event, I will not succumb. I already have several energy firm holdings, and another would disrupt the risk-reward balance of my portfolio.
Nevertheless, for others without such a problem (the risk-reward balance, not the eye thing) I think the stock is well worth considering.
